When the markets crash and you have a plan, you will make a lot of money. Below is my plan; if you wish to explore this idea with the group I’m putting together, email me – accredited investors only.

COMPANY

Company Y is a services company that has failed to generate meaningful sales traction in the market beyond two major customers. Currently, it is trading at less than 0.7x tangible asset value; however, if you include the value of the Company’s NOLs and patents, there is $75MM or more that can be made by tendering for the entire company. This window of opportunity will not last.

INVESTMENT BULLETS

Company started nearly 10 years ago and has raised over $300MM since its founding.

Company is operating near breakeven / cash flow neutral; long sales cycles and customer inertia have forced the Company to streamline its costs and broaden its service offering to attract new customers. They are in the early stages of this transition.

Service offering is unique and patented; growth potential in N. America and internationally.

Capital structure is clean; single share class and one convert outstanding (approx. $50MM).

There are no immediate liquidity concerns.

Management isn’t overpaying themselves or diluting the Company.

Over 35% of the shares outstanding are held by current or former insiders.

Minimal (or zero) CapEx needs going forward (growth or maintenance).

Activist recently took a 5% stake with Board representation.

Big 4 auditor.

THE NUMBERS

Equipment is worth $200MM per a recent independent audit.

NOLs of approximately $250MM expire in 15 years.

EV = Less than $150MM; big enough to be meaningful, but small enough to be overlooked by traditional investors and potential acquirers.

Ascribing no value to their customer relationships, data, operations or intellectual property – and only $25MM of value to their NOLs – implies a return opportunity of over $75MM.

A confluence of events means ideas from Buyside Notes are going to be few and far between over the next six weeks:

I’m off to visit Company X (note here) which continues to provide a compelling risk-adjusted opportunity. If you are interested in learning more, email me and I’ll happily share my thoughts when I get back.

Lightstream (which I’ve covered in-depth here and here) reported results last week (here). Included in those results was a downward revision to 2014 production volume, from 44k boe / d to 42k boe / d. The market did not take too kindly to the Company’s lower forecast, sending the stock down 10%.

But the market isn’t paying attention to the right things. And investors that know better should rejoice because acquiring ownership in LTS just became a lot cheaper. It’s a mantra that needs to be hung on every investor’s wall:

When the market freaks out and you know better, rejoice.

To the informed investors of Lightstream, this is what matters:

Sustainability should get to 100% or better this year.

Base decline continues to meet plans and will come in at 26% – 29% for the full year.

Debt is down to $1.89BN.

On Swan Hills – the problem area that sent forecasted production volume lower – the wells are still good oil wells. 7 wells are collectively producing 1,450 boe / d instead of 2,000 boe / d. Management noticed the deviation from expectations and immediately pushed pause to figure out why. This is what every prudent business owner should do.

What’s interesting – and a point the market has clearly ignored – is that funds flow (operating cash flow after interest expense) is still expected to meet guidance. I repeat: there was no change to projected cash flow.

With the two million total registration mark approaching for all new gTLDs, uptake for this program has been exceedingly strong overall. Most of our gTLDs have met or beat expectations to date. Internet users are voting with their wallets and their clicks, acclimating to a world in which specific, relevant domains support the development of meaningful online identities.

Rayonier Advanced Materials (RYAM) is a fantastic business. I first wrote it up here just prior to its spinoff from RYN. But I also laid out the case that 2014 was going to turn into a disappointment for RYAM. To quote myself:

I think RYAM will miss on production volumes in 2014 and end the year at 500k tons of specialty and 125k tons of commodity cellulose.

I believe that investors expecting 2014 to be on par with management’s guidance are going to be disappointed.

Turns out I wasn’t far off. On this morning’s call, Management confirmed that full year volumes should come in near my estimates (625k tons total; 25% of that would be commodity, 75% specialty) and EBITDA should be closer to $265MM (from their initial guidance just north of $300MM).

This was a miss. But it was a miss that should’ve surprised no one.

But the market is full of crazy people and it’s fully of lazy people, and the stock sold off rather dramatically after the news hit (down over 10% today).

To those investors that are neither crazy nor lazy, this dislocation may turn into a fantastic buying opportunity. To quote myself once again:

But where others see disappointment, I see opportunity. To understand why, you have to look through the next 12 – 24 months. You see, RYAM has already executed their large capital program. They already spent $385MM to transition their remaining commodity cellulose capacity to specialty; those costs are sunk. And when the market soaks up the existing excess capacity, RYAM shareholders will be the biggest beneficiaries of future specialty cellulose inflation. RYAM’s position reminds me of a quote from Warren Buffett:

In an inflationary world, a toll bridge would be a great thing to own because you’ve laid out the capital costs. You built it in old dollars, and you don’t have to keep replacing it.

If RYAM gets into the mid-20s, you will have the rare opportunity of owning a truly great business at 5x core future EBITDA earnings power.

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